DEVELOPMENT OF KAZAKHSTAN ECONOMY

The economy continued to grow rapidly in 2003 with greater pace in manufacturing showing the first fruits of economic diversification. An Industrial-Innovation Development Strategy will help deepen economic diversification and maintain growth momentum in the medium term.

GDP growth, led by the oil sector, averaged 11.0% during 2000-2002, and continued in 2003 at 9.2%. On the demand side, most of the 2003 expansion was driven by a 15% increase in real private consumption, supported by public sector wage raises and an expansion of bank credit.

On the production side, industry and, especially, services played major roles. Industry sector output grew by 8.8%-with manufacturing at 8.9% and mining at 8.1%-revealing the first signs of economic diversification, as food processing, machinery building, oil refining, and chemicals all showed marked production increases. Construction climbed by 9.3%, remaining a dynamic sector fueled by vigorous investment in housing and infrastructure development in the new capital, Astana. The services sector continued its very strong growth, of 11.1%, mainly due to a large rise in transport and communications. A slight decline in the grain harvest in 2003, offset by the good performance in the livestock subsector, led to agricultural growth of just 1.4%.

Continued economic growth helped foster employment and improve living standards. In 2003, real incomes rose by 8.3% with average monthly wages totaling T23,250 ($156). For the first time, real wages increased in all sectors, unlike previous years when wages rose significantly only in the manufacturing and financial subsectors. Unemployment declined to 8.7% from 9.3% in 2002, mainly due to greater employment in construction, services, and agriculture (Figure 2.22). Sustained economic growth and targeted poverty interventions helped reduce the number of people living below the subsistence minimum (T5,200 or $35 a month) to 21.0% from 24.2% in 2002.

The fiscal position remained robust in 2003. Buoyant tax collections led the Government in May to revise upward both revenue and expenditure targets. For the year, the budget deficit amounted to 0.9% of GDP, well below the planned 2.0% target. The revenue-to-GDP ratio edged up to 22.6% from 21.4% in 2002, largely due to strengthened tax administration. General budget expenditures rose to 23.5% of GDP, 2 percentage points higher than in 2002, as the supplemental budget lifted wages and pensions and raised expenditures for social sectors and national security. Social assistance and education remained the major items of recurrent expenditures, together accounting for 45% of such expenditures.

The monetary policy of the National Bank of Kazakhstan (NBK) continued to be accommodative in 2003. Broad money supply (M3) rose by 26.8% in response to continued economic growth and financial deepening. Credit to the economy jumped by about 46% as banks became more responsive in meeting the credit needs of small and medium enterprises and households.

During 2003, the tenge strengthened against the dollar by 12.6% in real terms, driven by large export earnings and foreign exchange inflows from increased private external borrowing and FDI. Under the managed float arrangement, NBK continued its policy of intervening in the market to prevent undue appreciation of the currency, though with limited tools for sterilization this led to a 52.2% expansion in reserve money. In contrast to its performance against the dollar, the tenge recorded real devaluations against the Russian ruble by 5.3% and the euro by 6.9%, which helped sustain the competitiveness of domestic producers.

The balance-of-payments position strengthened because of high world oil prices. The current account deficit was reduced from 2.8% of GDP in 2002 to 0.2% ($69 million) in 2003, reflecting a much improved trade balance. Merchandise exports soared by 32.0%, driven mainly by buoyant world oil prices; the increase in oil volume was only 7.9%. Imports surged by 18.4%, led by greater imports of capital goods and construction materials. Gross international reserves (including the assets of the National Fund of the Republic of Kazakhstan, which accumulates part of the Government’s oil and mineral revenues for stabilization purposes and savings for future generations) leaped by 69.3% over the year to $8,565 million at end-2003. The National Fund’s assets jumped by 89.0% to $3,606 million due to the strong hydrocarbon exports while NBK’s net international reserves shot up by $1,820 million or 58.1% to $4,959 million (4.8 months of imports).

While public external debt continued to fall in 2003, by 3.5% to $3.4 billion (equivalent to 12.4% of GDP), private external debt rose by 5.5%, pushing total external debt to $19.9 billion at end-2003, including intracompany debt (mainly among oil companies) that accounts for about 70% of private external debt. However, excluding intracompany debt, the debt-to-GDP ratio is 29.3%, representing a low external debt burden.

Major Economic Indicators, Kazakhstan, 2001-2005, %
Item	2001	2002	2003	2004	2005
GDP growth	13.5	9.8	9.2	9.5	9.5
Gross domestic investment/GDP	26.9	27.3	26.3	25.1	25.3
Inflation rate (consumer price index)	8.4	5.9	6.6	5.4	5.0
Money supply (M3) growth	45.1	32.8	26.8	23.4	18.4
Fiscal balance/GDP	-0.4	-0.3	-0.9	-1.9	-1.0
Merchandise export growth	-3.9	12.3	32.0	6.0	6.0
Merchandise import growth	11.1	1.6	18.4	12.4	6.8
Current account balance/GDP	-5.0	-2.8	-0.2	-1.1	-0.6
Debt service ratio	37.5	35.2	34.2	33.6	32.3
Sources: Ministry of Economy and Budget Planning; Ministry of Finance; National Bank of Kazakhstan; National Statistical Agency; staff estimates.